Rio Tinto acts on zircon glut

Rio Tinto
will look to limit its production of zircon next year amid a glut in that market that is causing particular pain for more heavily exposed rival
Iluka Resources
.

Rio’s head of minerals, Alan Davies, told investors the miner would “accelerate slightly" plans to rebuild smelters in South Africa and Canada so that the maintenance work could be carried out while there were weak market conditions.

Iluka is the world’s largest producer of zircon, used in ceramic glazes. Rio is the second largest producer, but in its case it is a byproduct of its titanium dioxide production and accounts for only 17 per cent of revenue.

“Our mine plans have limited ­flexibility to enable us to sort of select zircon-rich or non-rich material because we’re really mining for the overall value, which is the ilmenite sort of feed and then the metallics feed in North America," Mr Davies said. “So we do have a certain arising of zircon."

The pricing of zircon is very opaque, and lluka’s strategy has been to maximise price as much as possible, even if it came at the detriment of moving volumes. In August, the zircon price fell from $US2500 a tonne to around $US2100 a tonne after Rio held an auction to help assist with price discovery. Iluka has admitted it was in effect forced to follow suit and lower its own prices.

After a recent mineral sands industry conference in Hong Kong, Goldman Sachs lowered its forecast zircon price for next year to just $US1500 a tonne. Iluka shares have fallen 15 per cent since it released a disappointing quarterly production report in October.

Mr Davies said global zircon inventories had reached 10 to 11 months of supply, placing pressure on prices. But, he said, “as construction in urban areas picks up in China and the Middle East, for example, we expect the zircon industry to recover".

Following Rio’s briefing, UBS analyst Glyn Lawcock said it sounded like Rio would sell more zircon at most likely lower prices than had been the case this year. He added it appeared the zircon market had become “somewhat irrational".

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Titanium dioxide, which is used in pigment production, is the main focus of Rio’s minerals business. As old contracts roll off, Rio expects it can boost received prices by up to 300 per cent. This year, it expanded the business by purchasing BHP Billiton’s stake in the Richards Bay joint venture in South Africa for $US1.7 billion.

Mr Lawcock expects earnings before interest and tax from Rio Tinto’s minerals division to rise from $US498 million this year to $US1.8 billion next year.

The division is now Rio’s third-largest earner behind iron ore and copper.